Conservative debate around corporate tax reform has intensified, pitting interest groups and elected officials against one another, which is a good thing. Corporate tax reform is a complicated issue that must be hashed out to ensure we enact a structure that boosts growth, employment, and incomes.

There is one chance to get it right, so every plan must be carefully vetted. As this debate has growth, the border adjustment component of the House GOP’s tax plan has been battered. President Trump offered a mixed review of the idea to the Wall Street Journal; Axios, the Club for Growth, and Americans for Prosperity have opposed the proposal; and Sen. Mike Lee took to this publication to offer an alternative vision of tax reform.

For those new to the debate, a border adjustment tax is a tax on goods and services based on where they are sold rather than where they are produced. Functionally, this means exports are no longer taxed (since they are sold outside the country) and imports are. By backing away from a border adjustment, Republicans are making a major mistake. This policy will help narrow the trade deficit and fund a tax cut for all domestic businesses. That said, we can improve the House proposal.

Our Current Tax System Advantages Foreign Businesses

Without a border adjustment, U.S. tax code subsidizes international importers at the expense of domestic producers. Given the interplay between the U.S. corporate tax system and the value-added tax (VAT) system employed by more than 160 countries, U.S. producers suffer a structural imbalance.

Just to be clear, a VAT is a consumption tax applied at each stage of production. It is similar to a sales tax, but is applied to each incremental stage of production. Take a TV that is assembled by a manufacturer and sold to a retailer for $50, who then sells it for $75. In a country where the VAT is 20 percent, the manufacturer would owe $10 in taxes (20 percent of $50) and the retailer $5 (20 percent of the $25 in value it added).

Under our current tax code, companies pay taxes based on the profit they generate inside the United States. So if a company assembles a plane here and exports it overseas, it is liable for taxes on the profit generated from the export value minus input costs. Taxes on any profits earned beyond our borders would be only be due if the company repatriates them into the United States (a system everyone agrees needs to be altered to deal with the record cash pile trapped offshore).

Similarly, the United States only taxes foreign companies on income they generate from business “within the United States.” So, if a plane assembled overseas is imported here and sold, U.S. taxable income would be the sales price minus the import value. This means there are no taxes due from profits generated by building the plane. Any profits generated inside our borders are treated the same whether the product is exported, imported, or produced and consumed domestically.

Let’s Illustrate How This Works

Most countries use a VAT. In Mexico, it is 16 percent; in China, it is 17 percent on most goods; and European VATs are generally 15 to 25 percent. Let’s take Mexico as an example. A Mexican company that domestically produced and consumed a plane would be liable for the 16 percent tax. If the plane were imported from the United States into Mexico, the exporter would pay 16 percent on the value of the plane and then 16 percent on the difference between the final sales price and the export price. As such, either plane manufacturer would be assessed 16 percent on their entire value-added.

From Mexico’s side, it is treating the two plane producers fairly. In reality, the U.S. plane exporter would have had to pay U.S. taxes on the profit from building the plane in the U.S. plus 16 percent to Mexico. Meanwhile, the Mexican producer just pays the 16 percent. By having to pay U.S. taxes in addition to all of the same Mexican taxes, it is relatively more expensive for the U.S. manufacturer to export into Mexico compared to Mexican companies. So while neither system on a stand-alone basis is unfair, their interplay leads to an unfair outcome for American exporters.

Going the other way, let’s say the Mexican plane manufacturer assembled a plane in Mexico and exported it to the United States. As the VAT is essentially a sales tax and the final sale was not in Mexico, the Mexican government refunds any taxes collected along the way, and the U.S. assesses a tax on the difference between the final sales price and the import price. This means any profits earned from assembling the plane benefit from an artificially low tax rate given the lack of a Mexican VAT charged. Conversely, a domestic manufacturer has to pay U.S. income taxes on all the profits generated by the plane, from assembly to final sale. Once again, the American company pays more taxes than the Mexican company. This is the case for trade with every country that has a VAT—basically the whole world.

This system makes it relatively difficult for a U.S. company to export to the rest of the world and relatively easy for the rest of the world to export to us. Quite simply, U.S. producers are subsidizing importers. As a consequence, Americans enjoy some artificially cheap imported goods, but fund it with lower export-related employment. As any economics 101 student can tell you, subsidies permit inefficiencies, hurting an economy and employment over time.

We also need to recognize that many large companies use our tax system to minimize U.S. taxes. Since we only assess taxes on profits generated within the United States and exported products can avoid VAT taxes in international jurisdictions, companies have an incentive to bloat the value of imports into the United States, thereby minimizing profits within the United States.

Companies can do this via aggressive transfer pricing and moving intellectual property offshore. The current system of assigning profits to various jurisdictions is extremely complex, particularly as most intellectual property is, by definition, one of a kind, meaning there are no market-based transactions to determine the fair value.

If anything, the world is only getting more intellectual-property-intensive as technology becomes a larger part of our life. This is another reason it makes sense to move to a tax system that is more agnostic about where a product is produced and applies a tax to where it is consumed. This way, the U.S. government would tax all the profits of purchases in the United States no matter where the product is made, while leaving exports out of the IRS’s purview. This is actually a simpler system than what we currently have and is increasingly necessary in the twenty-first century.

There are three ways to deal with the structural imbalance resulting from the two different tax systems. First, the rest of the world could dump their VAT systems for a U.S.-like system, which is out of our control and not going to happen. Second, we could dump our tax system for our VAT. However, a VAT is often a back-door way to raise taxes on consumers to fund an ever-expanding government. Third, we can apply a border adjustment to balance the competing systems back into equilibrium. That strikes me as the best choice.

Now Let’s Look at the House Plan

The House GOP plan aims to solve the border problem by only making domestic revenue and expenses taxable while dropping marginal rates to 20 percent. This amounts to a 20 percent import tax and negative 20 percent export tax, or on net a 20 percent tax on the trade deficit. Over the past year, exports of goods and services have totaled about $2.22 trillion, while imports were $2.71 trillion, according to data from the Bureau of Economic Analysis. A 20 percent tax on the approximately $500 billion trade deficit would generate $100 billion in revenue, which would fund a cut in corporate income tax rates to 25 percent from 35 percent.

A company that exclusively exports and generates $100 in U.S. expenses gets $20 from Uncle Sam, even if those goods are sold for a profit overseas.

This plan has two virtues: it rebalances international taxes to put exporters on an equal footing, and it generates revenue that can be used to cut tax rates. As with ending any subsidy, import prices would go up, but export employment would also rise, and in competitive domestic industries, prices would fall given lower corporate income taxes. The lower trade deficit resulting from this tax change would likely push the dollar up somewhat but not enough to fully offset the tax change, as the correlation between the trade deficit and the 12-month change in the dollar (on a trade-weighted basis) is only 38 percent since 1999.

The negative of the House plan is that because exporters can deduct expenses but generate no domestic revenue, they turn a tax loss and would get a check from the government. A company that exclusively exports and generates $100 in U.S. expenses gets $20 from Uncle Sam, even if those goods are sold for a profit overseas. That is getting close to an outright export subsidy.

After all, under the VAT system in most foreign countries, a company gets the tax it has paid back, leading to a 0 percent VAT rate, but it doesn’t get money back on top of that, which the House GOP plan allows. Because of these payments to exporters, we have to tax imports 20 percent, which means the prices on some goods, like clothing, could go up materially, causing some sticker shock. While economically efficient in aggregate, the House plan could prove politically unpalatable since 20 percent price rises are rarely popular! Such price increases could cause near-term distortions and weakness in some industries.

What We Should Do Instead

Given the subsidy we provide importers at the expense of exporters, we do need a border adjustment, but there is a better way to go about it than the House plan. Rather than let exporters deduct domestic expenses, we should just zero out their income. While the House plan calculates income as domestic revenue less all domestic expenses, I suggest we only let companies deduct domestic expenses that generate domestic revenue.

For instance, a company that exports half its products would only deduct half its expenses when calculating domestic taxable income. Both its export revenue and expenses would be beyond the scope of the U.S. government. As such, exports would now be untaxed transactions, akin to how foreign governments don’t apply the VAT to exports. Overnight, we would turn all of America into a tax-free zone for exporters, making us competitive and incentivizing companies to relocate jobs here. Plus, by not writing refund checks and just zeroing out export income, the necessary import border adjustment is much smaller.

With this extra revenue, we could cut tax rates on domestic profits to 25 percent or slightly lower.

Let’s assume exporters generate a 20 percent pre-tax profit margin (in-line with corporate averages) and pay an effective 25 percent corporate tax rate (somewhat higher than average). That translates to about $110 billion in lost federal revenue under my plan. To earn back that revenue plus the $100 billion per year of the House plan, we would have to apply an approximately 7.7 percent tax on imports, far below the 20 percent in the House plan.

With this extra revenue, we could cut tax rates on domestic profits to 25 percent or slightly lower. While import prices would go up somewhat, domestic prices would fall as corporate tax savings are passed on to consumers, meaning overall inflation wouldn’t increase. Meanwhile, we will return our exporters to more level playing field and eliminate the subsidy importers receive. Going forward, the value of intellectual property held offshore would now be part of our tax base via the import tax, eliminating much of the incentive to move operations and assets overseas.

Without a border adjustment, the different tax structures in the United States and the rest of the world will create an unfair playing field, even though the two systems are fair in themselves. Even Lee’s interesting plan runs into problems by eliminating the corporate income tax and raising capital gains taxes. International importers that don’t have American investors could essentially import into the United States and pay no taxes to the U.S. government as there is no longer a corporate tax and there are no U.S. investors to collect the profits from through dividend taxation.

So long as foreign nations employ a different tax structure than we do, which is their sovereign right, we need a border adjustment to equalize the system for imports and exports. No alternative works as well. The House GOP is right to include it, although I would cut the import tax adjustment by not allowing exporters to collect refund checks.

A 0 percent export tax and 8 percent import adjustment would go a long way to leveling the playing field while generating crucial revenue that will allow us to cut taxes on all domestic business, making America a more attractive place to invest. Nothing says we are open for business again like turning the entire country into a tax-free zone for exporters.

President Trump and the House Republicans promised to cut tax rates and boost exports. This border adjustment system, if employed properly, will do both. Let’s get it done in the first 100 days.

Scott Ruesterholz is a politically active conservative in New York, NY. He works in financial services. He can be followed on Twitter @Read_N_Learn.